This commentary was written by Dr. Daniel Thornton of D.L. Thornton Economics.
The Wall Street Journal editorial’s claim (August 19) that the policies of the Obama administration “produced the slowest recovery in modern times,” is demonstratively false for two reasons.
The first is the fact that the economy’s growth rate has been trending down since at least 1970.
This is reflected in the figure below, which shows the growth rate of real GDP from 1970Q1 to 2019Q4, with the growth rates for each of six expansions. The growth rate of output declined during the last 4 expansions.
This fact suggests the strong possibility that the policies of the Obama administration had nothing to do with the historically slow growth during the last expansion.
It is also the case that the growth rate during the current expansion under the Obama administration, from 2009Q3 through 2016Q4, and the Trump administration, from 2017Q1 through 2019Q4, were nearly the same; 2.3% for the former compared with 2.5% for the latter.
The decline in trend growth occurred during both Democratic and Republican administrations.
It is due to deeper structural changes that transcend presidential administrations. Indeed, the declining trend is one of the reasons that I correctly predicted that the Trump tax cut would not produce the 3% to 4% economic growth that some had expected (see Economic Growth 2.3%: I Told You So!).
The second reason is more compelling than the first: An economy’s longer-run growth rate is determined by the growth rates of the quantity and quality of labor and capital (man-made factors of production, such as plants and machinery) and technological innovation. The economic policies of presidential administrations typically have little or no effect on the growth rates of these factors of production.
Nevertheless, economic policies could have contributed to the downward trend in the economy’s growth rate over the past 50 years. But they had to be policies that are able to produce deep and persistent structural change.
They are not the taxing and spending policies of a single administration. Furthermore, policies that can have a lasting and persistent effect on economic growth are not likely to have a noticeable effect immediately. It is more likely that their effect will intensify over time.
Alternatively, the downward trend in economic growth could be due to structural changes independent of the economic policies of any administration. Some candidates are: change in the age demographic of the population, an increasingly wealthy society that prefers leisure to work, the transition from a production economy to a service economy and a more poorly educated population. I’m sure my readers can think of others. Please send me your candidates!
The slow growth is not due to the short-run economic policies of a particular Democratic or Republican administration, but it is likely to continue regardless of the outcome of the November election.
This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.